Improving Operational Efficiency

Ch 23
(Stock Management, Lean Production)
Stock
Materials and goods required in order to produce for, and supply to the consumer is
called stock.
 Categories of Stock
 Raw material and components
 Work in process
 Finished goods
Stock Management
The purpose of stock management is to reduce stock cost into minimum level.
Stock management involves;
 Purchasing of stock and their delivery
 Storing and control of stock
 The issue and handling of stock
 Disposal of surpluses
 Providing information about stock
Problems Due to Inefficient Stock Management
 Insufficient stock is unable to meet unforeseen changes in demand of
product.
 Out of date stocks – medicine etc
 Stock wastage
 High level of stock causes high storage cost
 Poor management of stock purchasing can result in late deliveries, low
discounts from suppliers etc
 Stockholding Cost
 Opportunity cost
 Storage cost
 Risk of wastage and out dated
Stock-out Cost
Lost sales
Idle production resources
Special order could be expensive
Loss of goodwill
Loss of customer loyalty
Optimum Order Size
The purchasing manager must ensure that supplies of the right quality are delivered at the
right time in sufficient quantities to allow smooth and unbroken production.
 Economic Order Quantity (EOQ)
EOQ is the attempt to calculate the optimum stock order level, given the delivery
costs compared with the cost of holding stock. The higher the delivery cost in
relation to the stock holding cost, the larger the order level should be (to minimize
the number of deliveries).
(See figure 23.2 on page 360)
Re-order Level
Levels of stock when new order for stock is placed is called re-order level. We have
different methods;
 Fixed reorder interval- placing an order for stock after a specific time
  Fixed reorder level- placing an order for stock after reaching a fixed
amount of stock
 Two bin system – dividing stock into two bins when one is empty then
order for new and use second one.
 Buffer stock- minimum stock level to meet unforeseen demand and to cover break
in supplies.
 Lead time – the time between the order and delivery of goods.
 Stock pile - keeping the stock level which will fulfill demand till next few months
on any special event like Eid.
(See figure 23.3 on page 361)
Just in Time (JIT) stock control
 A stock control system which is designed to minimized the costs of
holding stocks in raw material, work in process and finished goods by very carefully
planned scheduling and flow of resources through the production process.
 It requires no buffer stock, just order raw material when you need, and
delivered finished goods as soon as they are completed.
 It requires a very efficient ordering system and delivery reliability.
 Important Requirement for JIT
o Excellent relationship with suppliers and employees
o Multi skilled production staff
o Flexible machinery
o Strong infrastructure
o Political stability
Lean Production
“Lean production is an approach to operations management aimed at reducing the
quantity of resources used up in production”.
 Key Features of Lean Production
o Simultaneous engineering instead Sequential engineering – all necessary
activities should start at same time instead of one after another or in sequence.
This approach will increase the speed of work.
o Flexibility – to handle technological advances and changing consumer
tastes there should be flexibility in these three areas;
• Flexible employment contracts – allows to change in workforce
according to the change in demand.
• Flexible machinery – that can be quickly change from one design
to another.
• Multi skills worker
 Kaizen –continues improvement
Kaizen is a Japanese term meaning continues improvement in productivity.
It is difficult to look for continuous improvement all the time. Japanese tried to solve
this problem by introducing PDCA (plan, do check action) cycle. It is a series of
activities that lead to improvement.
 Plan- business must identify that where improvement is needed. Data must be
gathered and used to develop a plan which will result in improvement.
 Do – the plan should be implemented by workers, on the production line
 Check – check whether or not there has been an improvement. This task may
be carried out by inspectors.
 Action – if plan has been successful, it must be introduced in all parts of the
business.
 Conditions necessary for Kaizen
 Team working
 Empowerment
 Involvement of all staff
Limitations see on page 367
 One-off improvement
Productivity remains same for long period of time and suddenly rises due to heavy
investment.